Net worth refers to the total value of an individual's or entity's assets minus their liabilities. It provides a snapshot of financial health by indicating what a person owns compared to what they owe. When a client is asking to borrow money, their net worth plays a crucial role in the lending decision.
Lenders often assess a client's net worth to determine their credit worthiness and ability to repay the loan. A higher net worth may indicate a stronger financial position, making it more likely for the client to secure a loan. Conversely, a low or negative net worth may raise concerns about the client's financial stability, potentially leading lenders to deny the loan or offer less favorable terms.
Collateral is an asset pledged by a borrow to secure a loan. If the borrower defaults, the lender can claim the collateral to recover the loan amount.
A numerical representation of a borrower's creditworthiness, based on their credit history. Higher scores indicate lower risk to lenders.
A measure of a borrower's monthly debt payments compared to their gross monthly income. It helps lender's assess repayment ability.
The percentage charged by lenders on the borrowed amount, typically expressed an an annual rate. It determines the cost of borrowing.
The length of time over which the borrower agrees to repay the loan. It can vary widely depending on the type of loan.
The original amount of money borrowed, not including interest or fees. Payments on a loan typically go toward reducing the principal.
The process of gradually repaying a loan over time through scheduled payments, which cover both principal and interest.
The process by which lenders assess the risk of lending to a borrower. It involves evaluating creditworthiness, financial history, and collateral offered.
A fee that lenders may charge if a borrower pays off the loan early, which compensates the lender for the loss of interest income.
A financial term used to express the ratio of a loan to the value of an asset purchased. It helps lenders assess risk.